Russia's economic boom and the burgeoning power of its energy sector will become increasingly hard to sustain unless it takes dramatic steps, an OECD report forecasts. It could mean bad news for the energy-hungry EU.
Russia's oil and gas is in demand but the sustainability of its energy sector is a worry
Expanding state ownership is a "step back" for the Russian economy, the OECD said in a report Monday that raised concerns over the sustainability of Russia's current boom at a time when the EU hopes to concur on a new Partnership and Cooperation Agreement with Russia by the end of the year.
"The trend towards greater state ownership should be reversed in order to improve performance and reduce opportunities for corruption and rent-seeking," the Organization for Economic Cooperation and Development said.
In recent years Russia has seen a significant expansion in state control over key sectors of the economy such as oil, aviation, power-generation equipment, automobiles and finance, the report said. The trend does not bode well for economic growth, the report's authors concluded.
"The corporate governance of many state-controlled companies is problematic and state interference in the operations of such companies often distorts the development of the companies themselves and the markets in which they operate."
Titanium giant VSMPO-Avisma earlier this year joined oil major Sibneft and Lada producer Avtovaz in coming under state control.
Gazprom's hunger for takeovers a concern
Gazprom's expansion plans may damage its core business
The report singled out energy giant Gazprom -- one of the world's largest companies -- for criticism. "Of particular concern is the state-owned gas monopolist Gazprom's seemingly insatiable appetite for asset acquisitions, often at the expense of its core business," the OECD said.
In recent years, Gazprom has accumulated significant media assets, bought up Sibneft and signaled an interest in major electricity-generating assets.
The OECD sees Gazprom's lack of focus as a problem for the whole economy while concern over the sustainability of Russia's gas supply is growing. The uninterrupted flow of cheap gas is essential to both the struggling electricity sector and the country's industrial base.
Transitory nature of growth rate spells trouble
Barroso and the EU rely heavily on Russia's oil and gas
This will also be of some concern for the European Union, whose planned partnership deal with Russia demands better and more secure access to Russia's vast oil and gas resources and calls for a Russian commitment to secure energy supplies into the 25-member bloc -- the biggest consumers of Russian oil.
"Although Russia continues to grow at relatively high rates, the main factors underpinning current growth are transitory," the OECD report said.
Russia's real GDP growth averaged 6.7 percent per year in 1999-2005, the OECD said, and Russia's Economic Development Minister German Gref predicted last week that 2006 growth would reach seven percent.
The spurt in competitiveness Russia enjoyed in the years after the 1998 financial crisis and the easy productivity gains secured by tapping excess capacity have all but disappeared, the report said.
While Russia continues to enjoy the benefits of sky-high commodity prices, the OECD predicted their effect on growth rates would fade as the economy grows accustomed to the flow of petrodollars.
Russia needs reform in other areas
Russia's health system is in need of a radical shake-up
As well as maintaining fiscal discipline, Russia must reform its healthcare system and its public administration, the report concluded.
The authors listed measures that would improve governance, including the adoption of freedom of information legislation and enhancing parliamentary oversight of the executive.
Corruption could be fought, the authors said, by strengthening enforcement and adopting "whistleblower protection legislation."
"The inefficiency and corruption of the state administration impose a heavy burden on business and limit the government's ability to implement any policies that make significant demands on the state's administrative or regulatory capacities," the report said.